Don't let it get away!

LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered, and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at RSA Insurance Group (LSE: RSA.L) , the insurance giant formerly known as Royal Sun Alliance that currently offers investors the second-highest yield in the FTSE 100, a whopping 8%.

Insuring a profit?Let's take a look at how RSA has performed against the FTSE 100 over the last 10 years. It isn't a very inspiring picture:

Total Return

2007

2008

2009

2010

2011

Trailing 10-Yr. Avg.

RSA

1.5%

-1.9%

-7.0%

10.8%

-8.8%

3.3%

FTSE 100

7.4%

-28.3%

27.3%

12.6%

-2.2%

7.3%

Source: Morningstar. Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

RSA's performance against the FTSE has been pretty poor, with only its high dividend yield preventing a negative total return over the last 10 years. Yet throughout this period, RSA has remained solidly profitable, and its generous dividends have provided investors with an attractive income. So, has it been unfairly penalized by the market?

What's the score?To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how RSA shapes up:

Item

Value

Year founded

1996*

Market cap

4.1 billion pounds

Net debt

1.3 billion pounds

Dividend Yield

8.0%

5-year average financials

Operating margin

9.6%

Interest cover

n/a

EPS growth

-1.8%

Dividend growth

14%

Dividend cover

1.96x

Source: Morningstar, Digital Look, RSA. *Royal Insurance Holdings and Sun Alliance merged to form RSA in 1996, but the Sun business has a history stretching back to 1710, giving the business a 300-year heritage.

Here's how I've scored RSA on each of these criteria:

Criteria

Comment

Score

Longevity

This business insured the homes of Captain James Cook and Charles Darwin, but has merged several times since.

4/5

Performance vs. FTSE

Failed to deliver earnings growth in recent years.

3/5

Financial strength

No obvious problems.

4/5

EPS growth

Failure to grow EPS could lie behind poor share price performance.

2/5

Dividend growth

High yield and strong growth, sensibly covered.

5/5

Total: 18/25

RSA's score of 18/25 reflects its apparently sound fundamentals and its generous and consistent dividend policy -- ideal for a retirement share. Despite this, RSA's current yield of 8% cannot last forever. As with its U.K. peer, Aviva, either the dividend will be cut or the share price will be re-rated. As with Aviva, I believe that the share price will eventually recover as poor investor sentiment and economic headwinds abate.

Naturally, there is a risk to this approach -- but even if RSA's dividend was halved, its yield would still be higher than the FTSE 100 average, providing a respectable income from a company with a very long history of successfully doing business in this sector.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Woodford's choices look like excellent retirement shares to me, and the report explains how he chose some of his biggest holdings.

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